NASPP Michigan Chapter Meeting

1. NASPP Michigan Chapter Meeting November 13, 2012

2. Chapter Announcements • NASPP Memberships • It’s renewal time! • All NASPP memberships expire on December 31 • Renew today to avoid the last minute rush and make sure you don’t miss any of the great webcasts planned for next year • Renew at Naspp.com

3. Chapter Announcements • NASPP Conference Audio • All NASPP Conference session are recorded; audio is available for purchase after the Conference • A great way to experience the Conference, catch up on industry developments, and hear some of the fabulous sessions presented by the industry’s top speakers • NASPP members can purchase a single session for just $65, additional discounts are available for multi-session purchases • Visit Naspp.com after the Conference to purchase the audio

4. Chapter Announcements • Introducing the NASPP Career Center • Post a job, post your resume details, browse jobs and gain valuable career information • Web site highlights • Free Job Bank: Any employer (NASPP member or not) can post an industry-related position • Chapter Job Board: Positions listed in our chapter area. When posting a job, you can associate it with up to three chapters • Resume Bank: Active NASPP members can post a resume profile for visibility to employers looking to fill job openings; resumes are searchable by those with access to the Career Center • Message Center: Central messaging area for communication between resume posters and employers, as well as email updates about new job openings or candidates that match your search criteria • Move forward in your career now by visiting the NASPP’s Career Center today at: http://www.naspp.com/CareerCenter/

5. Chapter Announcements • Are you on Facebook or Twitter? The NASPP is too! Follow the NASPP on Twitter or “like” us on Facebook • The NASPP posts announcements whenever we post new content on Naspp.com--it's a great way to keep up with all the content we have on the website • Current Facebook friends • The NASPP requests and encourages your further presence on our Facebook page • Respond to new interactive questions and/or “like” our posts as you feel appropriate • Visit the NASPP’s Facebook page today at: http://www.facebook.com/NASPP

6. Highlights from the 20th Annual NASPP Conference October 8th-12th New Orleans Presented by: Erin Newell, CEP Alicia Mladsi, CEP

7. Making Your Vendor Relationships More Effective • Larry Petz, CEP, Dana Holding Corp • Erin Madison, CEP, Broadcom • John Hammond, CEP, AST Equity Plan Solutions • Jen Baehr, CEP, NASPP

8. Making Your Vendor Relationships More Effective • Service Options • Outsourcing • Self-Administration • Partial Administration • Multi-vendor • Brokers • Record-keeping • Tax/Legal • Merchant Bank (India) • Trustee (Israel)

9. Making Your Vendor Relationships More Effective • Service Definition in the contract • Anyone involved in Equity should be included in the contract process • Attorneys will focus on legal language • Service Level Agreement, often not standard and should be requested in the contact

10. Making Your Vendor Relationships More Effective • Implementation of new vendor • Understand services & capabilities • Ask questions • Request references • Current Vendors • Schedule periodic meetings • Make suggestions for future enhancements • Training classes • Advisory Boards

11. Preserve Your Reserve (and your Sanity) • Megan Arthur, Cooley LLP • Denise Miller, Adobe Systems Incorporated • Scot Witz, W.W. Grainger, Inc • Julie Mrozek, Stock & Option Solutions, Inc.

12. Fungible Share Reserve Design • “Full Value” awards (Restricted stock, RSUs, Performance shares, etc.) count as more than one share • Example: Share reserve consists of 10M new shares with a 2 to 1 ratio for full value awards: • Stock options covering 10M shares may be issued OR • Full-value awards covering 5M shares OR • Some combination of full-value awards and options

13. Fungible Share Reserve Design • Where does the ratio come from? • Most often, from an ISS derived “value-neutral” ratio for determining the “cost” of the share increase, based on the ratio of the value of a full value award and an option/SAR award under the ISS proprietary model • What is ISS? • Institutional Shareholder Services (“ISS”, a division of RiskMetrics Group) - a leading provider of corporate governance data and investment decision support tools

14. Fungible Share Reserve Design – Adobe Systems • Have multiple plans with multiple sets of ratios • Tracking is done by: • Placing fungible ratios in a user defined field on each grant record • Filtering on this field for reporting

15. Reconciliation Example of Fungible Share Pool Tracking

16. Share Counting - Liberal • Only shares actually issued reduce the share reserve. Reserve is nt reduces by any shares subject to all types of stock awards that: • Expire or terminate • Are settled in cash • Are forfeited back to or repurchased by the company • Are reacquired by the company in satisfaction of tax withholding obligations or as consideration for the exercise or purchase price of the stock award.

17. Share Counting – Non-Liberal • Non Liberal Share counting: ISS and other proxy advisory firm policies • Liberal share counting will result in higher “cost” of the plan • To avoid higher cost, reserve must be reduced by any shares that: • Are not issued because they are used for a net exercise • Are reacquired by the company in satisfaction of tax withholding obligations or as consideration for the exercise or purchase price of an option or stock appreciation right.

18. The Future of Equity Compensation • James Humza, Bank of America Merrill Lynch • Kurt Bremer, Morgan Stanley Smith Barney • Jim Wilforst, ETRADE Corporate Services • Moderated by, Elizabeth Doge, CEP, Stock & Option Solutions

19. The Future of Equity Compensation • What are your thoughts about the future direction of outsourcing plan administration? • Outsource will continue, forced to do more with less • War for talent • ‘Right Sourcing’ – finding the right solution

20. The Future of Equity Compensation • What are the greatest overall challenges facing the equity compensation industry today? • War for talent • Education & Tax Planning

21. The Future of Equity Compensation • What are the most significant challenges of global stock plans & how do you envision our industry rising to those challenges? • Mobility- need to automate • Communication & Education- translation

22. Equity Compensation Crossfire: Cutting-Edge Plan Design • Terry Adamson, Aon Hewitt • Barbara Baksa, NASPP • Jennifer Kirk, Google • Michael Mclanahan, Fidelity • Russell Miller, ClearBridge Compensation

23. Equity Compensation Crossfire: Cutting-Edge Plan Design • Grant Frequency • Cash Settled • Automated Execution • Equity Choice • Capped Awards

24. Equity Compensation Crossfire: Cutting-Edge Plan Design • Typical Annual Grants • More Frequent • Quarterly or Semiannually • Administrative Challenges • Less Frequent • Grant intended to span several years (i.e. Steve Jobs) • Governance challenges

25. Cash Settled Awards • Can be authorized under plan but cash (rather than shares) used to settle the award • Cash settled RSUs • Cash settled SARs • Cash Payment not from a market sale of stock • Different accounting treatment • Paying out cash and have no control how much

26. Automatic Exercise • Administrative feature designed to ensure that a participant’s in-the-money grants are exercised automatically at point of expiration • Typically plan sponsor set percentage or dollar amount where auto exercise occurs • $0.50 per share ($20 grant exercises at $20.50) • 1% trigger ($20 grant exercises at $20.20 FMV)

27. Equity Choice Program • Allow employees to choose the type of award they receive • Choices might include options, full value awards, performance awards, cash • Size of award adjusted commensurately so that employees receive same grant value regardless of choice (i.e. Solium plan is 3 options to 1 RSU) • NOTE: Need to educate employees on tax and legal consequences.

28. Capped Awards • May be allowing payout of cash and don’t want to have uncontrolled amount of distribution • Limits effects of dilution for share payouts

29. Value & Valuations: Making Sense of Long-Term Incentive Data • Terry Adamson, Aon Hewitt • Billy Vitense, Starbucks • Fred Whittlesey, Compensation Venture Group

30. Value & Valuations: Making Sense of Long-Term Incentive Data • Starbucks Coffee Company • How partners perceive value? • Show partners how economic value is translated to # of shares • Stock Options • Performance RSU

31. Value & Valuations: Making Sense of Long-Term Incentive Data • Make it clear on upcoming events • Provide schedule of grants & vesting • 5 P’s- Proper Planning Prevents Poor Performance • Planning leads to overall goal of creating Financial Wellness

32. Paying for Performance in an Unpredictable Market • Yonat Assayag, Clearbridge Compensation Group • Mark Borges, Compensia • Rose Marie Orens, Compensation Advisory Partners

33. Paying for Performance in an Unpredictable Market • Shareholders demanding more evidence that executive pay is aligned with company performance • Increased use of performance based Long Term Incentives • Improved disclosure • Companies are challenged with effective performance measurement / goal setting process

34. Paying for Performance in an Unpredictable Market • Incentive measure selection requires balancing the shareholder and executive perspectives • Shareholders: Want concrete results that justify cash payments or ownership dilution • Executives: Want to be motivated to increase company value

35. Paying for Performance in an Unpredictable Market • Key considerations • Possible performance measures • Performance measurement timeframes • Goal setting • Pay / performance relationship

36. Identifying Incentive-Based Performance Measures • Why stock price is not always the answer • Management’s day to day decisions are not immediately reflected • Measures should be under the control of the executive and be correlated with shareholder return in the long run • Selection should take into account the incentives “motivational impact” on various participant types

37. Evaluating Different Measures • Total Shareholder Return (TSR) With Pricebegin= share price at beginning of period, Priceend = share price at end of period, Dividends = dividends paid and TSR = Total Shareholder Return, TSR is computed as: TSR = (Pricebegin – Priceend + Dividends ) / Pricebegin

38. Evaluating Different Measures • Total Shareholder Return (TSR) • Advantages • Gets to the heart of what investors desire • Easy to calculate and communicate • Can’t be manipulated • Disadvantages • Still uses stock price as a component, which does not reflect managements day to day decisions and includes market conditions not in control of management

39. Evaluating Different Measures • Revenue • Advantages • Rewards “top line” performance/growth of the company • Ideal for developing companies with the only objective to build scale and market share • Aligns to outcomes that executives can directly impact • Easy to measure and understand • Disadvantages • Ignores several important factors such as costs of goods sold, tax strategies, etc. • Does not reward for managing the other aspects of the business and may discourage leadership decisions

40. Evaluating Different Measures • Gross Profit • Advantages • Aligns to outcomes that executives can directly impact • Easy to measure and understand • Encourages selling more product at the highest martin possible • Disadvantages • Does not reward for managing other aspects of the business • May discourage leadership decisions

41. Evaluating Different Measures • Earnings before interest taxes depreciation amortization (EBITDA) • Advantages • Encourages selling more product at the highest cash operating margin • Excludes legacy decisions such as capital expenditures, acquisitions, financing and tax strategies that may take away from current operating achievements • A good short term measure of operating performance • Disadvantages • Requires calculation rather than a reported number • Ignores several important factors such as costs of goods sold, tax strategies

42. Effective Goal Setting in a Volatile Market • Proper alignment of threshold, target and superior performance and payouts is critical • Typically threshold performance levels are very achievable (85% - 90% chance of achievement) • Target performance levels are more difficult to achieve (~60%) • Maximum performance levels represent “stretch” and are very difficult to achieve (10-15% chance)

43. Top 10 Pay for Performance Pitfalls to Avoid • Wrong Measure • Right Measure, Wrong Goal • Right Measure, Wrong Behavior • Not Enough Stretch • Too Much Stretch • Paying Below Street Guidance • The “Perfect” Measure vs. the “Right” Measure • Pay for Failure • Poor Disclosure • No Surprises!!

44. Withhold Now Or Forever Speak Your Piece • William Dunn, PricewaterhouseCoopers LLP • Wendy Jennings, Riverbed Technology, Inc. • Ameena Majid, Seyfarth Shaw LLP • Donna Spinola, McKesson Corporation

45. Withhold Now Or Forever Speak Your Piece • General Administrative Considerations • Timeline • Communicate • Choices vs. Requirements

46. Withhold Now Or Forever Speak Your Piece • Share Withholding vs. Sell to Cover • Pros and cons of each • Cash Withholding • FICA withholding for retirees • Rule of Administrative Convenience • Delay the timing in which employer make take into account deferred amounts, no later then end of calendar year • International withholding for ESPP

47. Withhold Now Or Forever Speak Your Piece • ISO • General rule, no withholding for ISO • Pennsylvania does require withholding

48. Managing Mobile Employees at Home and Abroad • Scott Sander – Amazon.com • Mark Miller – Deloitte Tax LLP • Rive Rutke – Deloitte Tax LLP

49. Managing Mobile Employees • There is an increasing need for countries to find new sources of revenue. • According to CIA World Fact Book, government spending exceeds revenues in numerous countries including: • United Kingdom 26% ●India 47% • United States 60% ●Ireland 94% • Australia 11% ●Japan 25%

50. Why is this my problem? • Mobile employees may trigger tax withholding and reporting obligations for the employer in multiple jurisdictions • Global tax withholding and reporting failures in the employee tax burden passing to the employer • HR impact can be as painful as the tax penalties